Carousel Economics and the Trillion Dollar coin14th January 2013

I tend to get a little enthusiastic when discussing economics and the woeful systems and decisions applied to our world by our politicians and central bankers, or indeed by the bureaucrats who seem to pull their strings these days. My tenor is not helped by the mainstream media who often seem to consider that the value of pets doing something vaguely amusing in front of a camera is of greater merit than the financial security of our society.

No wonder people seek amusement, as they rightly feel let down by Economists with a capital “E”. Did they foresee the crisis? Mostly no. Did they encourage the crisis through inappropriate earlier responses to smaller crises? Mostly yes. Do they care? Well failure doesn’t seem to have done much to change the approach of many of them, who as beneficiaries of our current systems seem to have little interest in changing things.

But many active Economists do get it, and Keynes encouraged this approach, famously saying “When the facts change, I alter my conclusions. What do you do, sir?”.

Increasingly economists with a small “e”, of which I modestly class myself as one, get it, and their enthusiasm for better results may be starting to encourage the open-mindedness of a few capital “E” Economists.

The visible failings in Economics seem to be identifying the symptoms rather than the cause, the wrong theories applied to the wrong details[1], a lack of original thought, a lack of examination of clear alternatives and hence a desire to keep doing more of the same even when it isn’t producing the desired result. Hence the merry-go-round of QE1, QE2, QE3, QE4 and similar silo policies causing ever greater economic distortions and hallucinogenic policy responses.

Money is a social construct, and is valuable only as long as we the people believe it to be valuable, which perhaps explains the efforts at the centre to continue the merry-go-round. The latest nonsense is the genuinely serious debate over the US mint producing a single platinum coin, and saying that it is worth a trillion dollars, in order to overcome the latest and again imminent challenges of the debt ceiling.

As someone who has spent much of his career troubleshooting real-life businesses, identifying the underlying issues, winning support for tackling the real priorities, then getting on with it, it is easy to see that the fumbled approach to Economics is bound to fail us, and indeed it has.

Is there a common failing that has created this strange situation? Maybe it starts with learning at University. I skipped University, preferring to start a career and earn a living, despite having the opportunity to study Economic Geography. It was an interesting time, with the European Coal & Steel Community having evolved into the European Economic Community, other countries signing up to the European Free Trade Association, and the start of the European Monetary System; perhaps I could have changed the world had I graduated. Or maybe I would have been sucked into the Economic vortex and lost the power to recognise that different cultures have different Economic expectations, needs and imperatives.

Had I studied hard, I might have discovered rather earlier in life that much of traditional Economic teaching relates to systems that just don’t exist any more. Our debased currencies are no longer readily convertible into real assets, and the pricing mechanisms of a substantially free market have been distorted by the huge growth of the public sector. At a practical level this affects everything from the transactions underlying international trade, bank risk management, interest rates, house prices, and the thought process of a small local employer wanting to invest in developing his staff. And these impacts have generally not been for the better.

As with all progress, to secure a better future we need to encourage open minds and fresh initiative. Happily today’s young people are curious, knowing that there must be other answers out there. In 2011 there was a walkout of students at Harvard. Their letter to Professor Mankiw stated:

Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.

As Harvard undergraduates, we enrolled in Economics 10 hoping to gain a broad and introductory foundation of economic theory that would assist us in our various intellectual pursuits and diverse disciplines, which range from Economics, to Government, to Environmental Sciences and Public Policy, and beyond. Instead, we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.

A legitimate academic study of economics must include a critical discussion of both the benefits and flaws of different economic simplifying models….”

Now I have no idea whether these students were subversives, or genuine free thinkers, but I admire their desire to question rather than to throw bottles. The beleaguered Professor Mankiw, as Chairman of Economics at Harvard, actually has the bestselling Economics textbook in the USA, but at over 800 pages it isn’t a quick read. So in my search for justice and balance, here are his “Ten Principles”:

#1 People face tradeoffs

#2 The cost of something is what you give up to get it

#3 Rational people think at the margin

#4 People respond to incentives

#5 Trade can make everyone better off

#6 Markets are usually a good way to organize economic activity

#7 Governments can sometimes improve market outcomes

#8 A country’s standard of living depends on its ability to produce goods and services

#9 Prices rise when the government prints too much money

#10 Society faces a short-run tradeoff between inflation and unemployment

As an economist with a little ”e” I’d agree with 7 out of 10 of his points, and be open to discussion on the other 3. Maybe some wouldn’t reach your top 10. But if all Economists stood back and reminded themselves regularly of Mankiw’s Ten Principles we might be in a much better place than we are today. And Professor Mankiw’s ability to encapsulate Economics into just 10 principles is worth celebrating as a superb model in compression.

Even more commendable is the ability of any man, especially an Economist, to see the funny side in those who take a different view. So top marks to Professor Mankiw, who on his own blog is open enough to carry a comic translation of his Ten Principles, which for Economists and economists of all persuasions is well worth a view (click here).

Now you know what I like to watch instead of amusing pets. The open-mindedness of people like Professor Mankiw and those who challenge him gives me hope.


Principal inspiration: Pragcap.com (writer Cullen Roche)

[1] As an example, see last week’s FYI blog on GDP here.